Key Takeaways

The pay gap is generally measured and reported in one of two ways— either as a raw/aggregate figure or an adjusted figure.

Both methods offer insights into how effectively companies are managing pay equity and the development of their talent pipelines.

In isolation, pay gap numbers don’t tell the whole story about the gender wage gap – investors should also evaluate the processes companies are using to manage and analyze pay decisions.

Women earn 80 cents for every dollar earned by men in the U.S. Big banks in the U.S. report women earn 99% of that of their male counterparts. Several U.K. companies have reported women earn as much as 50% less than what men earn. Large tech companies report they’ve achieved gender pay parity.

Which figure is correct?

In short, all of them.

How do investors and other stakeholders make sense of this? The fact is, in isolation, these numbers don’t tell the whole story about the gender wage gap or the overall gender gap in the workforce. The discrepancies stem largely from how the pay gap is measured and reported. Typically, the pay gap is measured in one of two ways—either as a raw/aggregate figure or an adjusted figure —and both offer insights into how effective companies have been in managing not just pay equity, but the development of their talent pipelines as well.

Aggregate Figures vs. Adjusted Figures

In the U.S., we’ve largely seen companies publicly report adjusted gender pay gaps—meaning they have conducted a statistical analysis, often with the help of a third-party, that incorporates attributes such as job category/role, region/market, experience, tenure, education, performance and other drivers of pay, to account for legitimate pay differences. Studies have shown that the pay gap between men and women tends to shrink substantially when you conduct this type of analysis, but an unexplained gap still remains.1 Company analyses of adjusted pay gaps have generally mirrored these findings. At Apple’s 2016 Annual Meeting, CEO Tim Cook announced women earned 99.6 cents for every $1 earned by men and that the company was taking steps to eliminate the discrepancy (which it later did). After conducting a pay analysis for its U.S. employees, SAP spent $1 million to close a gap identified for just under 1% of its workforce—including women and men.

We’re also seeing companies report aggregate, or raw, gender pay gaps—largely due to a new mandate in the UK requiring companies with more than 250 employees to report the gender pay gap in aggregate terms. This means that a company reports on the difference between what men and women earn on average, regardless of job function or level. Essentially, this raw gap exists within companies because women continue to be significantly outnumbered by men at senior leadership levels and in the highest paying positions. It’s well documented that women are vastly underrepresented in senior leadership and top earner roles, and according to new research from Georgetown, women tend to be better represented in lower-paying occupations even in high-paying professions. Only about 10% of companies have reported in the UK ahead of the April 2018 deadline, but these raw pay gaps, such as the 50% gap recently reported by Barclays, are a startling illustration of the gender inequity that remains in the workforce.

At Pax, we see value in examining gender pay gaps in both ways. First, beyond complying with state and federal laws, ensuring pay equity for employees in similar roles by analyzing the adjusted pay data can lead to more productive, motivated employees, reduce turnover, and improve overall company performance.2 Second, understanding the drivers behind the raw gender pay gap can illuminate where women are stagnating in an organization, and where companies should pro-actively focus resources aimed at retention and employee development. Among the strategies Mercer outlines to drive impact and advance diversity is to “ensure pay equity—remediate and close the gap.” In that sense, companies that are successful in closing pay gaps within job categories—equal pay for equal work—and place a real emphasis on advancement opportunities for women, will position themselves to make meaningful progress in narrowing the gender gaps throughout their talent pipelines, and by extension, the raw gender pay gap.

Process and Management

Often lost or obscured in the discussion of these numbers, is the complex story behind how companies are managing and analyzing pay decisions for equity. Our goal as investors is to understand the processes to determine if companies are taking the appropriate steps to manage regulatory, reputational and litigation risks associated with pay equity. In our recent dialogues with companies, we’ve found the story of how companies are working to identify, understand and address discrepancies to perhaps be more insightful than the numbers themselves in illustrating a company’s approach and commitment to pay equity.

Through Pax’s engagements with companies, we’ve learned what works. Leading companies not only have robust mechanisms in place to identify unexplained discrepancies in pay (including salary, bonuses and incentive compensation) and remediate them, but also examine performance ratings and reviews to ensure they are free of bias. Other companies have eliminated questions about salary history from the interview process on a companywide basis to prevent past inequities from perpetuating. Further, companies recognize this is not a simple check-the-box exercise; regular monitoring of pay equity is crucial in keeping gaps closed, and they are committed to ongoing transparency around their efforts. For instance, some companies have signaled their willingness to disclose information on the percentage of employees requiring pay adjustments after an analysis—much like KeyCorp in 2018—a point that we believe speaks to the overall effectiveness of their policies and gives more authenticity to their disclosure. We’ve also recognized that the gender pay gap can’t be closed overnight, and gaps can reappear, as Salesforce found when it completed its most recent pay analysis. Companies that are taking a careful, thoughtful approach to identify long-ranging solutions seem more likely to achieve pay parity in the future.

Though there are many factors that have served to perpetuate both the raw and adjusted gender wage gap over time—lack of access to paid family leave, unaddressed sexual harassment and discrimination, to name a few—we view recent efforts undertaken by companies to advance equal pay and diversify their workforces in the wake of investor, customer and employee pressure, as major steps forward in the fight to close the global gender gap.

The statements and opinions expressed are those of the author of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security.

Heather Smith, Lead Sustainability Research Analyst, researches and evaluates the environmental, social and governance (ESG) performance of companies for inclusion in the firm’s portfolios. She is also a member of the Pax World Gender Analytics team and the portfolio management team of the Pax Ellevate Global Women’s Leadership Fund. Heather is involved in overseeing the firm’s proxy voting and coordinating its gender related shareholder engagements.

The evidence that sustainability, or ESG, has financial relevance continues to grow. As we look for reasons why sustainability seems to be associated with good performance, risk has emerged from the literature as one of the main contributors. Read more

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